<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
(Mark one)
_X_ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1996
OR
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
Commission file number 0-9900
HBO & COMPANY
(Exact name of registrant as specified in its charter)
DELAWARE 37-0986839
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
301 PERIMETER CENTER NORTH
ATLANTA, GEORGIA
30346
(Address of principal executive offices)
(Zip Code)
(770) 393-6000
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last
report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes _X_ No ___.
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
CLASS SHARES OUTSTANDING AT OCTOBER 31, 1996
- ------------------------------------ ----------------------------------------
Common Stock, $.05 par value 86,722,195
Exhibit Index on Page 10
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<PAGE>
HBO & COMPANY
PART 1--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
CONSOLIDATED BALANCE SHEETS--UNAUDITED
(000 Omitted)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and Cash Equivalents......................................................... $ 121,321 $ 81,919
Receivables, Net of Allowance For Doubtful Accounts of $8,530 and $9,238.......... 216,885 168,377
Current Deferred Income Taxes..................................................... 17,939 17,836
Inventories....................................................................... 6,642 7,782
Prepaids and Other Current Assets................................................. 9,026 9,706
------------- ------------
TOTAL CURRENT ASSETS............................................................ 371,813 285,620
------------- ------------
INTANGIBLES
Net of Accumulated Amortization of $27,680 and $16,243............................ 176,556 185,744
CAPITALIZED SOFTWARE
Net of Accumulated Amortization of $24,574 and $32,387............................ 48,101 45,032
PROPERTY AND EQUIPMENT
Net of Accumulated Depreciation of $105,792 and $94,804........................... 42,933 44,588
DEFERRED INCOME TAXES............................................................... 27,793 22,773
OTHER NONCURRENT ASSETS, NET........................................................ 10,143 6,129
------------- ------------
TOTAL ASSETS........................................................................ $ 677,339 $ 589,886
------------- ------------
------------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Deferred Revenue.................................................................. $ 56,606 $ 73,808
Other Current Liabilities......................................................... 170,008 144,853
------------- ------------
TOTAL CURRENT LIABILITIES....................................................... 226,614 218,661
------------- ------------
LONG-TERM DEBT...................................................................... 213 3,642
OTHER LONG-TERM LIABILITIES......................................................... 9,956 10,718
------------- ------------
TOTAL LIABILITIES............................................................... 236,783 233,021
------------- ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred Stock, 1,000 Shares Authorized and No Shares Issued..................... -- --
Common Stock, $.05 Par Value, 250,000 Shares Authorized and 118,455 and 119,332
Shares Issued................................................................... 5,923 3,137
Additional Paid-in Capital........................................................ 347,522 346,986
Retained Earnings................................................................. 164,613 96,525
------------- ------------
518,058 446,648
Treasury Stock, at Cost (31,789 and 33,819 Shares)................................ (77,502) (89,783)
------------- ------------
TOTAL STOCKHOLDERS' EQUITY...................................................... 440,556 356,865
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.......................................... $ 677,339 $ 589,886
------------- ------------
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</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral
part of these consolidated financial statements.
2
<PAGE>
HBO & COMPANY
CONSOLIDATED STATEMENTS OF INCOME--UNAUDITED
(000 Omitted Except for Per Share Data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ----------------------
1996 1995 1996 1995
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
REVENUE:
Recurring...................................................... $ 75,618 $ 74,870 $ 228,816 $ 180,239
One-Time Sales................................................. 120,516 82,882 316,170 224,137
---------- ---------- ---------- ----------
Total Revenue................................................ 196,134 157,752 544,986 404,376
OPERATING EXPENSE:
Cost of Operations............................................. 87,827 75,895 245,270 193,480
Marketing...................................................... 27,875 22,162 78,218 57,987
Research and Development....................................... 14,932 12,458 42,444 33,239
General and Administrative..................................... 19,337 17,893 58,333 46,214
Nonrecurring Charge............................................ 26,214 10,961 26,214 136,481
---------- ---------- ---------- ----------
Total Operating Expense...................................... 176,185 139,369 450,479 467,401
---------- ---------- ---------- ----------
OPERATING INCOME (LOSS).......................................... 19,949 18,383 94,507 (63,025)
Other (Income) Expense, Net...................................... (716) 11 (2,238) 265
---------- ---------- ---------- ----------
Income (Loss) Before Provision (Credit) for Income
Taxes.......................................................... 20,665 18,372 96,745 (63,290)
Provision (Credit) for Income Taxes.............................. 8,267 6,896 38,154 (26,416)
---------- ---------- ---------- ----------
NET INCOME (LOSS)................................................ $ 12,398 $ 11,476 $ 58,591 $ (36,874)
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
EARNINGS (LOSS) PER SHARE:
Primary........................................................ $ .14 $ .13 $ .66 $ (.46)
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Fully Diluted.................................................. $ .14 $ .13 $ .65 $ (.46)
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
WEIGHTED AVERAGE SHARES OUTSTANDING:
Primary........................................................ 89,736 88,400 89,312 79,399
Fully Diluted.................................................. 89,865 88,587 89,608 79,399
CASH DIVIDENDS DECLARED PER SHARE................................ $ .02 $ .02 $ .06 $ .06
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these consolidated financial statements.
3
<PAGE>
HBO & COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS--UNAUDITED
(000 Omitted)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
ENDED SEPTEMBER 30,
--------------------
1996 1995
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (Loss) for the Period.......................................................... $ 58,591 $ (36,874)
Adjustments to Reconcile Net Income (Loss) to Net Cash Provided by Operating Activities:
Depreciation and Amortization........................................................... 31,763 25,990
Nonrecurring Charge..................................................................... 26,214 136,481
Provision (Credit) for Noncurrent Deferred Income Taxes................................. 11,085 (1,358)
Changes in Assets and Liabilities, Net of Acquisitions:
Receivables........................................................................... (48,418) (16,071)
Current Deferred Income Taxes......................................................... 714 (4,830)
Inventories........................................................................... 1,140 (1,441)
Prepaids and Other Current Assets..................................................... 1,148 (1,344)
Noncurrent Deferred Income Tax........................................................ 564 (35,377)
Other Noncurrent Assets............................................................... (1,960) (247)
Deferred Revenue...................................................................... (17,202) (7,739)
Other Current Liabilities............................................................. 8,379 (13,247)
Other, Net.............................................................................. 523 (37)
--------- ---------
Total Adjustments................................................................... 13,950 80,780
--------- ---------
Net Cash Provided by Operating Activities........................................... 72,541 43,906
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Sale of Property and Equipment............................................................ 739 258
Capital Expenditures...................................................................... (12,388) (8,496)
Capitalized Software...................................................................... (16,179) (14,051)
Purchases of Businesses, Net of Cash Acquired............................................. (4,078) (12,594)
Other..................................................................................... 1,260 --
--------- ---------
Net Cash Used in Investing Activities............................................... (30,646) (34,883)
--------- ---------
NET CASH PROVIDED BEFORE FINANCING ACTIVITIES....................................... 41,895 9,023
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from Long-Term Debt.............................................................. -- 60,500
Proceeds from Short-Term Debt............................................................. -- 5,000
Proceeds from Issuance of Common Stock.................................................... 10,629 8,975
Repayment of Capital Leases............................................................... (527) (405)
Purchase of Treasury Stock................................................................ (1,026) (148)
Repayment of Long-Term Debt............................................................... (4,527) (62,035)
Payment of Dividends...................................................................... (7,042) (6,259)
Repayment of Notes Payable................................................................ -- (10,000)
--------- ---------
Net Cash Used in Financing Activities............................................... (2,493) (4,372)
--------- ---------
INCREASE IN CASH AND CASH EQUIVALENTS....................................................... 39,402 4,651
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD............................................ 81,919 31,462
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.................................................. $ 121,321 $ 36,113
--------- ---------
--------- ---------
CASH PAID DURING THE PERIOD FOR:
Interest.................................................................................. $ 779 $ 2,986
Income Taxes.............................................................................. $ 21,651 $ 13,961
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these consolidated financial statements.
4
<PAGE>
HBO & COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The consolidated financial statements include all adjustments that, in
the opinion of management, are necessary for a fair presentation of the results
for the periods indicated. All such adjustments are of a normal recurring
nature. Quarterly results of operations are not necessarily indicative of annual
results. Certain previously reported amounts have been reclassified to conform
to the current presentation. These statements should be read in conjunction with
the consolidated financial statements and the notes thereto included in the
Company's 1995 Annual Report to Stockholders.
2. All share and per share amounts have been restated to reflect a
two-for-one stock split effected in the form of a stock dividend that was paid
on June 10, 1996, to all stockholders of record on May 27, 1996. In addition,
share amounts have been restated as necessary to reflect an increase in the
number of shares of authorized common stock from 60 million to 250 million,
effective May 15, 1996.
3. During the first quarter of 1996, the Company increased the amount
available under its existing long-term revolving credit agreement from $25
million to $30 million. As of September 30, 1996, there was no outstanding
balance. Interest is payable at the Company's option of prime or LIBOR plus a
margin determined by certain of the Company's financial ratios (6.0625% as of
September 30, 1996). A variable commitment fee on the revolving credit agreement
is payable quarterly on the unused portion of the commitment (.1875% for the
third quarter of 1996). The agreement, which expires June 30, 1997, contains
certain net worth, income, cash flow and financial ratio covenants. The Company
is in compliance with these covenants at September 30, 1996.
During the first quarter of 1996, the Company canceled one of its two $5
million unsecured lines of credit.
The Company has extended until June 30, 1997, its agreement with a financial
institution whereby the Company can sell on an ongoing basis, with partial
recourse, an undivided interest in a pool of customer receivables. As of
September 30, 1996, the amount available to be sold was $30 million and the
amount sold was $15 million. Interest is payable at the Company's option of
prime or LIBOR plus a margin determined by certain of the Company's financial
ratios (6.0625% as of September 30, 1996). The Company, as agent for the
purchaser, retains collection and administrative responsibilities for the
receivables sold.
4. On August 21, 1996, the Company completed the acquisition of CyCare
Systems, Inc. (CyCare), a provider of physician practice management software
systems and electronic data interchange services for medical group practices,
faculty practice plans and medical enterprises. CyCare stockholders received
0.86 of a share, of HBOC Common Stock for each share of outstanding CyCare
Common Stock, or an aggregate of approximately 4.4 million shares. Because the
acquisition was accounted for as a pooling of interests, all prior period
amounts have been restated.
5. On September 19, 1996, the Company completed the acquisition of
Management Software, Inc. (MSI), a privately held provider of software solutions
for the homecare industry. MSI stockholders received approximately 895,000
shares of HBOC Common Stock in the transaction. Because the acquisition was
accounted for as a pooling of interests, all prior period amounts have been
restated.
6. On September 23, 1996, the Company signed a definitive agreement (the
"Merger Agreement") to acquire GMIS Inc. (GMIS), a developer of data quality and
decision support software for the payer marketplace. Pursuant to the Merger
Agreement GMIS stockholders will receive 0.42 of a share of HBOC Common Stock
for each share of GMIS Common Stock, subject to possible adjustment as provided
in such agreement. The transaction, which is subject to certain conditions
including GMIS stockholder approval, will be accounted for as a pooling of
interests and is currently expected to close before the end of 1996.
7. During the third quarter of 1996, the Company recorded a $26.2 million
nonrecurring charge relating to the acquisitions of CyCare and MSI. The charge
consisted of transaction costs of $6.7 million, a write-off of capitalized
research and development costs for discontinued products of $6.3 million,
severance and employee-related costs of $3.7 million and other product-related
costs of $9.5 million.
5
<PAGE>
HBO & COMPANY
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
IN THE THIRD QUARTER OF 1996, HBOC COMPLETED THE ACQUISITIONS OF CYCARE AND
MSI IN POOLING TRANSACTIONS. ALL PRIOR PERIOD INFORMATION HAS BEEN RESTATED FOR
THESE TRANSACTIONS.
UNLESS STATED OTHERWISE, ALL EXPENSE, INCOME AND PER SHARE AMOUNTS EXCLUDE
THE FOLLOWING NONRECURRING CHARGES AND INCLUDE THE DILUTIVE EFFECT OF STOCK
OPTIONS WHERE APPROPRIATE: I) $26.2 MILLION RELATED TO THE ACQUISITIONS OF
CYCARE AND MSI IN THE THIRD QUARTER OF 1996; II) $11.0 MILLION RELATED TO THE
SEPTEMBER 1995 ACQUISITION OF CLINICOM INCORPORATED; AND III) $125.5 MILLION
RELATED TO THE JUNE 1995 ACQUISITION OF FIRST DATA HEALTH SYSTEMS CORPORATION
(NOW KNOWN AS THE CHARLOTTE PRODUCT GROUP OR CPG).
INCLUDING THE NONRECURRING CHARGES AND EXCLUDING THE DILUTIVE EFFECT OF
STOCK OPTIONS WHERE APPROPRIATE, EARNINGS PER SHARE FOR THE QUARTER AND NINE
MONTHS ENDED SEPTEMBER 30, 1996, WERE $.14 AND $.65, RESPECTIVELY, COMPARED TO
$.13 AND ($.46) FOR THE QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 1995.
RESULTS OF OPERATIONS
QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 1996, COMPARED TO QUARTER AND
NINE MONTHS ENDED SEPTEMBER 30, 1995:
SUMMARY
For the quarter and nine months ended September 30, 1996, HBO & Company
posted earnings per share of $.31 and $.83, respectively, a 55% increase over
earnings per share of $.20 for the third quarter of 1995, and a 54% increase
over earnings per share of $.54 for the first nine months of 1995.
Total HBOC revenue for the third quarter of 1996 increased 24% to $196.1
million from $157.8 million in the third quarter of 1995, and 35% to $545.0
million from $404.4 million, for the nine months ended September 30, 1996,
compared to the same period in 1995, primarily due to strong software license
fee, hardware and service revenue.
Operating expense increased only 17% for the third quarter and 28% for the
nine months ended September 30, 1996, compared to the same periods in 1995. The
Company continues to make progress in the area of employee productivity, with
revenue per average employee at September 30, 1996, of $174,000, up from
$150,000 at September 30, 1995.
These changes in revenue and expense combined to boost net income for the
quarter and nine months ended September 30, 1996, by 56% to $28.1 million and
65% to $74.3 million, respectively.
REVENUE
Software license fee revenue grew 81% to $59.3 million for the third quarter
of 1996 and 58% to $143.0 million for the nine months ended September 30, 1996,
compared to the same periods in 1995. These increases were primarily due to the
continuing strong demand for the Pathways 2000 line of enterprisewide solutions
and strong sales of the Company's STAR 2000 hospital information system
products. In addition, third-quarter CyCare (now known as the CyCare Business
Group or CBG) revenue increased more than 200% due to increased sales of
Pathways Practice Management.
Hardware revenue increased 20% to $31.5 million for the third quarter and
35% to $87.6 million for the nine months ended September 30, 1996, compared to
the same periods in 1995. These increases were primarily from hardware related
to the strong sales of CPUs in conjunction with increases in software sales and
a continuing effort to increase sales of add-on hardware to existing customers
through an expanded telemarketing group.
Implementation and other services revenue for the quarter and nine months
ended September 30, 1996, increased 25% to $29.7 million from $23.8 million, and
24% to $85.5 million from $69.1 million,
6
<PAGE>
HBO & COMPANY
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS. (CONTINUED)
compared to the same periods in 1995. These increases were primarily due to
numerous implementations resulting from the last several quarters of strong
system sales and the addition of CPG for the nine-month period. The Company
continues to invest in programs designed to streamline the implementation
process and encourage customer ownership of each step of that process. As a
result, the productivity of the Company's implementation personnel continues to
improve.
Maintenance and support revenue increased 2% to $44.8 million for the third
quarter of 1996 and 24% to $134.6 million for the nine months ended September
30, 1996, compared to the same periods in 1995. The growth rate for the third
quarter of 1996 was lower than historical rates, primarily due to strategic
decisions to divest certain low-margin support services, closure of CPG
Australia operations and a third-party agreement for an imaging product.
Excluding the effect of these items, maintenance and support revenue increased
8% for the third quarter. The increase for the nine months was primarily due to
growth in other product lines and expansion of the customer base from
acquisitions. To manage this growth, the Company introduced a central support
system in the second quarter of 1996 and is in the process of implementing it
for the entire employee and customer base.
Remote processing revenue decreased 13% from $12.1 million to $10.5 million
for the third quarter of 1996 compared to the third quarter of 1995. This was
mainly due to the planned conversion of CPG customers from remote processing to
HBOC's in-house systems. For the nine months ended September 30, 1996, remote
processing revenue increased 133% to $32.8 million from $14.1 million for the
first nine months of 1995 due to the June 1995 purchase acquisition of CPG.
Recurring revenue as a percent of total revenue decreased to 39% in the
third quarter of 1996 compared to 47% for the same period in 1995, and decreased
to 42% for the nine months ended September 30, 1996, from 45% for the same
period in 1995. These decreases in recurring revenue as a percent of total
revenue were due to strong software sales, higher implementation revenue and
decreasing revenue from remote processing.
EXPENSE
Cost of operations as a percent of revenue decreased to 45% from 48% in both
the quarter and the nine months ended September 30, 1996, compared to the same
periods in 1995. These decreases were mostly a result of employee productivity
enhancements and strong high-margin software sales. In conjunction with
decreases in cost of operations as a percent of revenue, the gross margin for
the quarter and the nine months ended September 30, 1996, was 55% for both
periods, compared to 52% for the same periods in 1995. Cost of operations
expense increased in both periods as compared to 1995 primarily due to increased
hardware costs associated with the growth in hardware sales, increased software
royalties expense due to increases in software sales and increased personnel
expense due to the overall growth of the Company. Cost of operations expense for
the nine months ended September 30, 1996, also increased due to 1995
acquisitions, including costs associated with the CPG remote processing data
center, software and hardware maintenance expense and amortization of
intangibles.
Marketing expense as a percent of revenue remained constant at 14% for both
the quarter and nine months ended September 30, 1996, compared to the same
periods in 1995. Marketing expense increased for both periods primarily due to
higher personnel and commission expenses directly related to the growth in size
and revenue of the Company.
Research and development (R&D) expense as a percent of revenue remained
constant at 8% for both the quarter and nine months ended September 30, 1996,
compared to the same periods in 1995. The R&D capitalization rate decreased from
29% to 27% for the third quarter and from 29% to 28% for the nine months ended
September 30, 1996, compared to the same periods in 1995. The R&D capitalization
rates decreased because CyCare and MSI costs are being capitalized more
conservatively in 1996 to conform to
7
<PAGE>
HBO & COMPANY
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS. (CONTINUED)
HBOC's capitalization policies. The increase in actual R&D expense is mainly due
to R&D related to 1995 acquisitions and additional personnel for new product
development.
General and administrative (G&A) expense as a percent of revenue decreased
to 10% in the third quarter of 1996 from 11% in the third quarter of 1995, but
remained stable at 11% for the nine months ended September 30, 1996, compared to
1995. Actual G&A expense increased primarily due to increased facilities costs
and increased personnel expense due to acquisitions and growth of the Company.
For all periods presented, operating expense grew at a slower rate than
revenue due to strong software sales, successful cost-control programs and
productivity enhancements. Total operating income increased 57% for the third
quarter of 1996 and 64% for the nine months ended September 30, 1996, compared
to the same periods in 1995. In addition, operating income as a percent of
revenue increased to 24% and 22% for the quarter and nine months ended September
30, 1996, compared to 19% and 18% for the same periods in 1995. These increases
represent a significant growth in volume and increased efficiency in operations.
The tax rate increased to 40% from 39% for both the quarter and nine months
ended September 30, 1996, compared to the same periods in 1995. This increase
was due to the pooling acquisition of MSI, which had formerly been a Subchapter
S Corporation and therefore did not provide for corporate taxes on a historical
basis.
LIQUIDITY AND CAPITAL RESOURCES
SEPTEMBER 30, 1996, COMPARED TO DECEMBER 31, 1995:
The Company continues to improve the quality of its balance sheet. At
September 30, 1996, with $121.3 million in cash, no bank debt and an improving
current ratio, the Company remains well positioned for continued growth.
During the first nine months of 1996, the Company generated $72.5 million in
cash flow from operations. The Company used $30.6 million in investing
activities, primarily consisting of $16.2 million for software development
capitalization, $12.4 million for capital expenditures and $4.0 million for a
contractual payment associated with the 1995 purchase of Pegasus Medical Ltd. An
additional $2.5 million was used in financing activities, which is the net of
$9.6 million provided by stock transactions, $7.0 million used for the payment
of dividends and $5.1 million used to repay pre-acquisition long-term debt of
CyCare. As a result, the Company's cash balance increased by 48% to $121.3
million at September 30, 1996, from $81.9 million at December 31, 1995.
The Company's current ratio increased to 1.64:1 at September 30, 1996, from
1.31:1 at December 31, 1995. Current assets increased $86.2 million, mainly
reflecting increases in receivables and cash. The Company's management places a
high priority on the area of receivables and the Company continues to maintain a
low delinquency rate. Current liabilities increased $8.0 million primarily due
to an increase in customer deposits and acquisition accruals.
HBOC has access to several financing sources, including a $5 million line of
credit and a $30 million revolving credit agreement. As of September 30, 1996,
there were no outstanding balances on either.
HBOC's performance has placed The Company in a position of flexability, with
the choice of using cash, debt or equity financing to promote growth, make
strategic investments and improve quality.
8
<PAGE>
ARTHUR ANDERSEN LLP
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and
Board of Directors of
HBO & Company:
We have reviewed the accompanying consolidated balance sheet of HBO &
COMPANY (a Delaware corporation) AND SUBSIDIARIES as of September 30, 1996 and
the related consolidated statements of income for the three- and nine-month
periods and cash flows for the nine-month period then ended. These financial
statements are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the financial statements referred to above for them to be in
conformity with generally accepted accounting principles.
Arthur Andersen LLP
Atlanta, Georgia
October 16, 1996
9
<PAGE>
HBO & COMPANY
PART II--OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES.
On September 19, 1996, HBOC issued 893,748 shares of its Common Stock to the
six former security holders of MSI in exchange for all the outstanding stock of
MSI in a transaction exempt under Section 4(2) of the Securities Act of 1933, as
amended. On October 30, 1996, HBOC filed a registration statement on Form S-3
registering for resale the shares of its Common Stock issued in connection with
such transaction.
ITEM 5. OTHER INFORMATION.
The following are unaudited combined operations for the first month
subsequent to the acquisition of MSI.
<TABLE>
<CAPTION>
FOR THE MONTH
ENDED OCTOBER 31,
--------------------
1996 1995
--------- ---------
<S> <C> <C>
Revenue................................................................. $ 50,113 $ 42,498
Net Income.............................................................. $ 4,197 $ 3,141
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
2 Agreement of Merger dated September 23, 1996, by and among
HBO & Company, HBO & Company of Georgia, and GMIS Inc.
Incorporated by reference from Exhibit 2 to the registrant's
Registration Statement on Form S-4 (File No. 333-14357).............................. n/a
11 Statement regarding computation of per share earnings................................ 13
15 Letter re: unaudited interim financial information................................... 14
27a Financial Data Schedule..............................................................
27b Financial Data Schedule restated for June 30, 1996...................................
27c Financial Data Schedule restated for March 31, 1996..................................
27d Financial Data Schedule restated for December 31, 1995...............................
27e Financial Data Schedule restated for September 30, 1995..............................
27f Financial Data Schedule restated for June 30, 1995...................................
27g Financial Data Schedule restated for March 31, 1995..................................
27h Financial Data Schedule restated for December 31, 1994...............................
</TABLE>
(b) Reports on Form 8-K filed during the quarter ended September 30, 1996,
or subsequent to that date but prior to the filing date of this Form 10-Q:
FORM 8-K DATED AUGUST 27, 1996:
Reporting under Item 5 that on August 21, 1996, the Company completed the
acquisition, by merger, of CyCare Systems, Inc. (CyCare) a provider of
physician practice management software and electronic data interchange
for medical group practices, faculty practice plans and medical
enterprises. CyCare shareholders voted to approve the merger at a special
meeting of stockholders held on August 21, 1996. CyCare stockholders
received 0.86 of a share of HBOC Common
10
<PAGE>
HBO & COMPANY
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (CONTINUED)
Stock for each share of CyCare Common Stock. Approximately 4.4 million
HBOC shares were issued for the approximately 5.1 million outstanding
CyCare shares.
FORM 8-K DATED SEPTEMBER 11, 1996:
Reporting under Item 5 that on September 9, 1996, HBOC announced the
promotion of Jay Lapine to the position of vice president and general
counsel for the Company. Lapine replaces senior vice president and
general counsel James A. Gilbert, who resigned to assume the position of
president and chief operating officer of Atlanta-based IMNET Systems,
Inc.
Reporting under Item 5 that on September 11, 1996, HBOC announced it had
completed a definitive agreement to acquire Management Software, Inc.
(MSI), a privately held provider of software solutions for the homecare
industry. MSI stockholders received approximately 895,000 shares of HBOC
Common Stock in the transaction.
FORM 8-K DATED SEPTEMBER 23, 1996:
Reporting under Item 5 that on September 19, 1996, HBOC announced it had
completed the previously announced acquisition of Management Software,
Inc.
FORM 8-K DATED SEPTEMBER 27, 1996:
Reporting under Item 5 that on September 24, 1996, HBOC announced the
signing of a definitive agreement to acquire GMIS Inc., (GMIS) a
developer of data quality and decision support software for the payer
marketplace. The acquisition, which is subject to certain conditions
including GMIS stockholder approval, will be accounted for as a pooling
of interests and is expected to close before the end of 1996.
11
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HBO & COMPANY
(Registrant)
By: /s/ JAY P. GILBERTSON
-----------------------------------------
Jay P. Gilbertson
SENIOR VICE PRESIDENT--FINANCE, CHIEF
FINANCIAL OFFICER, PRINCIPAL ACCOUNTING
Date: November 11, 1996 OFFICER, TREASURER AND ASSISTANT SECRETARY
12
<PAGE>
EXHIBIT 11
HBO & COMPANY AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE OF COMMON STOCK
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
(000 OMITTED EXCEPT FOR PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE NINE
ENDED MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- ---------------------
1996 1995 1996 1995
--------- --------- --------- ----------
<S> <C> <C> <C> <C>
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING........................................... 86,288 84,661 86,032 79,399
ADD Shares of common stock assumed issued upon exercise of stock
options using the "treasury stock" method as it applies to the
computation of primary earnings per share*....................... 3,448 3,739 3,280 --
--------- --------- --------- ----------
NUMBER OF COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING............ 89,736 88,400 89,312 79,399
ADD Additional shares of common stock assumed issued upon exercise of
stock options using the "treasury stock" method as it applies to
the computation of fully diluted earnings per share*............. 129 187 296 --
--------- --------- --------- ----------
NUMBER OF COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING ASSUMING
FULL DILUTION....................................................... 89,865 88,587 89,608 79,399
--------- --------- --------- ----------
--------- --------- --------- ----------
NET EARNINGS (LOSS) FOR PRIMARY AND FULLY DILUTED EARNINGS (LOSS) PER
SHARE............................................................... $ 12,398 $ 11,476 $ 58,591 ($ 36,874)
--------- --------- --------- ----------
--------- --------- --------- ----------
EARNINGS (LOSS) PER SHARE:
PRIMARY............................................................ $0.14 $0.13 $0.66 ($0.46)
--------- --------- --------- ----------
--------- --------- --------- ----------
FULLY DILUTED...................................................... $0.14 $0.13 $0.65 ($0.46)
--------- --------- --------- ----------
--------- --------- --------- ----------
</TABLE>
- ------------------------
* Common Equivalent Shares are not presented for the nine months ended
September 30, 1995, because the effect is anti-dilutive.
All share and per share amounts have been restated to reflect the 1996
two-for-one stock split effected in the form of a stock dividend.
13
<PAGE>
EXHIBIT 15
ARTHUR ANDERSEN LLP
To HBO & Company:
We are aware that HBO & Company has incorporated by reference in its
previously filed registration statements on Form S-8, its Form 10-Q, for the
quarter ended September 30, 1996, which includes our report dated October 16,
1996 covering the unaudited interim consolidated financial information contained
therein. Pursuant to Regulation C of the Securities Act of 1933 (the "Act"),
that report is not considered a part of the registration statement prepared or
certified by our firm or a report prepared or certified by our firm within the
meaning of Sections 7 and 11 of the Act.
Arthur Andersen LLP
Atlanta, Georgia
October 16, 1996
14
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM HBO &
COMPANY CONSOLIDATED STATEMENT OF INCOME FOR THE NINE MONTHS ENDED 9/30/96 AND
HBO & COMPANY CONSOLIDATED BALANCE SHEET AT 9/30/96 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 121,321
<SECURITIES> 0
<RECEIVABLES> 225,415
<ALLOWANCES> 8,530
<INVENTORY> 6,642
<CURRENT-ASSETS> 371,813
<PP&E> 148,725
<DEPRECIATION> 105,792
<TOTAL-ASSETS> 677,339
<CURRENT-LIABILITIES> 226,614
<BONDS> 0
0
0
<COMMON> 5,923
<OTHER-SE> 434,633
<TOTAL-LIABILITY-AND-EQUITY> 677,339
<SALES> 228,816
<TOTAL-REVENUES> 544,986
<CGS> 245,270
<TOTAL-COSTS> 450,479
<OTHER-EXPENSES> (2,238)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 96,745
<INCOME-TAX> 38,154
<INCOME-CONTINUING> 58,591
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 58,591
<EPS-PRIMARY> 0.66
<EPS-DILUTED> 0.65
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM HBO &
COMPANY CONSOLIDATED STATEMENT OF INCOME FOR THE SIX MONTHS ENDED 6/30/96 AND
HBO & COMPANY CONSOLIDATED BALANCE SHEET AT 6/30/96 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 102,991
<SECURITIES> 0
<RECEIVABLES> 209,554
<ALLOWANCES> 8,464
<INVENTORY> 5,835
<CURRENT-ASSETS> 336,263
<PP&E> 144,549
<DEPRECIATION> 101,741
<TOTAL-ASSETS> 632,061
<CURRENT-LIABILITIES> 210,761
<BONDS> 0
0
0
<COMMON> 5,967
<OTHER-SE> 405,144
<TOTAL-LIABILITY-AND-EQUITY> 632,061
<SALES> 195,654
<TOTAL-REVENUES> 348,852
<CGS> 157,443
<TOTAL-COSTS> 274,294
<OTHER-EXPENSES> (1,522)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 76,080
<INCOME-TAX> 29,887
<INCOME-CONTINUING> 46,193
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 46,193
<EPS-PRIMARY> 0.52
<EPS-DILUTED> 0.51
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM HBO &
COMPANY CONSOLIDATED STATEMENT OF INCOME FOR THE THREE MONTHS ENDED 3/31/96 AND
HBO & COMPANY CONSOLIDATED BALANCE SHEET AT 3/31/96 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 83,143
<SECURITIES> 0
<RECEIVABLES> 186,248
<ALLOWANCES> 8,700
<INVENTORY> 9,241
<CURRENT-ASSETS> 293,649
<PP&E> 141,585
<DEPRECIATION> 97,997
<TOTAL-ASSETS> 600,125
<CURRENT-LIABILITIES> 207,201
<BONDS> 0
0
0
<COMMON> 3,137
<OTHER-SE> 379,318
<TOTAL-LIABILITY-AND-EQUITY> 600,125
<SALES> 87,720
<TOTAL-REVENUES> 164,376
<CGS> 74,011
<TOTAL-COSTS> 130,268
<OTHER-EXPENSES> (787)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 34,895
<INCOME-TAX> 13,659
<INCOME-CONTINUING> 21,236
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 21,236
<EPS-PRIMARY> 0.24
<EPS-DILUTED> 0.24
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM HBO &
COMPANY CONSOLIDATED STATEMENT OF INCOME FOR THE TWELVE MONTHS ENDED 12/31/95
AND HBO & COMPANY CONSOLIDATED BALANCE SHEET AT 12/31/95 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 81,919
<SECURITIES> 0
<RECEIVABLES> 177,615
<ALLOWANCES> 9,238
<INVENTORY> 7,782
<CURRENT-ASSETS> 285,620
<PP&E> 139,392
<DEPRECIATION> 94,804
<TOTAL-ASSETS> 589,886
<CURRENT-LIABILITIES> 218,661
<BONDS> 0
0
0
<COMMON> 3,137
<OTHER-SE> 353,728
<TOTAL-LIABILITY-AND-EQUITY> 589,886
<SALES> 316,526
<TOTAL-REVENUES> 571,461
<CGS> 273,608
<TOTAL-COSTS> 606,398
<OTHER-EXPENSES> 78
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (35,015)
<INCOME-TAX> (15,588)
<INCOME-CONTINUING> (19,427)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (19,427)
<EPS-PRIMARY> (0.24)
<EPS-DILUTED> (0.24)
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM HBO &
COMPANY CONSOLIDATED STATEMENT OF INCOME FOR THE NINE MONTHS ENDED 9/30/95 AND
HBO & COMPANY CONSOLIDATED BALANCE SHEET AT 9/30/95 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> SEP-30-1995
<CASH> 36,113
<SECURITIES> 0
<RECEIVABLES> 174,667
<ALLOWANCES> 10,920
<INVENTORY> 3,730
<CURRENT-ASSETS> 226,950
<PP&E> 136,252
<DEPRECIATION> 92,334
<TOTAL-ASSETS> 541,430
<CURRENT-LIABILITIES> 193,684
<BONDS> 0
0
0
<COMMON> 3,137
<OTHER-SE> 324,851
<TOTAL-LIABILITY-AND-EQUITY> 541,430
<SALES> 224,137
<TOTAL-REVENUES> 404,376
<CGS> 193,480
<TOTAL-COSTS> 467,401
<OTHER-EXPENSES> 265
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (63,290)
<INCOME-TAX> (26,416)
<INCOME-CONTINUING> (36,874)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (36,874)
<EPS-PRIMARY> (0.46)
<EPS-DILUTED> (0.46)
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM HBO &
COMPANY CONSOLIDATED STATEMENT OF INCOME FOR THE SIX MONTHS ENDED 6/30/95 AND
HBO & COMPANY CONSOLIDATED BALANCE SHEET AT 6/30/95 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> JUN-30-1995
<CASH> 31,556
<SECURITIES> 0
<RECEIVABLES> 158,975
<ALLOWANCES> 4,189
<INVENTORY> 6,103
<CURRENT-ASSETS> 215,997
<PP&E> 134,405
<DEPRECIATION> 88,815
<TOTAL-ASSETS> 528,724
<CURRENT-LIABILITIES> 186,078
<BONDS> 0
0
0
<COMMON> 3,135
<OTHER-SE> 311,445
<TOTAL-LIABILITY-AND-EQUITY> 528,724
<SALES> 141,255
<TOTAL-REVENUES> 246,624
<CGS> 117,585
<TOTAL-COSTS> 328,032
<OTHER-EXPENSES> 254
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (81,662)
<INCOME-TAX> (33,312)
<INCOME-CONTINUING> (48,350)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (48,350)
<EPS-PRIMARY> (0.63)
<EPS-DILUTED> (0.63)
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM HBO &
COMPANY CONSOLIDATED STATEMENT OF INCOME FOR THE THREE MONTHS ENDED 3/31/95 AND
HBO & COMPANY CONSOLIDATED BALANCE SHEET AT 3/31/95 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> MAR-31-1995
<CASH> 30,382
<SECURITIES> 0
<RECEIVABLES> 127,159
<ALLOWANCES> 3,297
<INVENTORY> 5,727
<CURRENT-ASSETS> 177,201
<PP&E> 128,595
<DEPRECIATION> 89,371
<TOTAL-ASSETS> 328,837
<CURRENT-LIABILITIES> 136,729
<BONDS> 0
0
0
<COMMON> 2,935
<OTHER-SE> 170,991
<TOTAL-LIABILITY-AND-EQUITY> 328,837
<SALES> 67,546
<TOTAL-REVENUES> 117,170
<CGS> 57,658
<TOTAL-COSTS> 97,150
<OTHER-EXPENSES> (13)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 20,033
<INCOME-TAX> 7,796
<INCOME-CONTINUING> 12,237
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,237
<EPS-PRIMARY> 0.15
<EPS-DILUTED> 0.15
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM HBO &
COMPANY CONSOLIDATED STATEMENT OF INCOME FOR THE TWELVE MONTHS ENDED 12/31/94
AND HBO & COMPANY CONSOLIDATED BALANCE SHEET AT 12/31/94 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> JAN-01-1994
<PERIOD-END> DEC-31-1994
<CASH> 31,462
<SECURITIES> 0
<RECEIVABLES> 127,716
<ALLOWANCES> 3,283
<INVENTORY> 4,286
<CURRENT-ASSETS> 176,647
<PP&E> 125,767
<DEPRECIATION> 86,144
<TOTAL-ASSETS> 317,004
<CURRENT-LIABILITIES> 149,670
<BONDS> 0
0
0
<COMMON> 2,933
<OTHER-SE> 153,519
<TOTAL-LIABILITY-AND-EQUITY> 317,004
<SALES> 253,359
<TOTAL-REVENUES> 421,740
<CGS> 217,108
<TOTAL-COSTS> 360,781
<OTHER-EXPENSES> (467)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 61,426
<INCOME-TAX> 23,056
<INCOME-CONTINUING> 38,370
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 38,370
<EPS-PRIMARY> 0.49
<EPS-DILUTED> 0.49
</TABLE>
